Bank of Canada holds interest rate as it takes stock of trade war impacts

The Bank of Canada is holding steady on interest rates as it gauges the extent of the damage that deepening trade conflicts have had on the domestic and global economies.

The rate decision Wednesday, which was widely expected, kept the central bank’s overnight rate at 1.75 per cent and followed a solid second-quarter rebound for the Canadian economy.

But the bank’s accompanying policy statement said some of the strength seen earlier this year will likely be temporary and it predicted economic activity to slow in the second half of 2019. It also underlined the weak spots — such as a sharp contraction in Canadian business investment that coincided with the increased trade tensions.

The intensification of the U.S.-China trade war has been a bigger drag on global economic momentum than the bank had predicted at its July 10 meeting, the statement said.

“Canada’s economy is operating close to potential and inflation is on target,” the bank said in the statement, its first public comments since the July rate announcement and monetary policy report.

“However, escalating trade conflicts and related uncertainty are taking their toll on the global and Canadian economies.”

The current level of policy stimulus remains appropriate and the bank will continue to monitor the evolving international conditions ahead of its Oct. 30 meeting, the statement said.

“As the bank works to update its projection in light of incoming data, governing council will pay particular attention to global developments and their impact on the outlook for Canadian growth and inflation,” said the bank, referring to next month’s rate decision and monetary policy report.

The bank said the unexpected strength in the second quarter was fuelled by rebounds in energy production and exports. Housing activity also bounced back faster than anticipated although the bank warned it could pile more debt onto already stretched households.

The statement noted that while wages have increased, consumer spending was unexpectedly weak in the second quarter.

Heading into the announcement, governor Stephen Poloz was widely expected to leave the rate unchanged, even as other central banks have begun to make or signal cuts.

Many analysts have predicted the bank will lower rates at its next rate announcement on Oct. 30, mostly due to expanding trade risks and the deteriorating global economy.

On Thursday, Bank of Canada deputy governor Lawrence Schembri will provide more detail about the governing council’s thinking when he gives a speech and holds a news conference in Halifax.

The bank’s decision Wednesday kept the rate at 1.75 per cent for seventh-consecutive policy meeting. The Canadian economy experienced an abrupt deceleration over the winter that nearly brought growth to a halt.

Last week, a report from Statistics Canada said the economy expanded at an annualized pace of 3.7 per cent in the second quarter, which was higher than the Bank of Canada’s projection of 2.3 per cent.